Human capital is the term for the collective capability, knowledge and skills of the people that are employed by an organisation. Measuring human capital provides a data-driven approach to identifying effective people management practices, which, if done well, can help ensure that value creation is long-term and sustainable.
This factsheet explores the challenges surrounding the measurement of human capital and the three clear levels of data collection and analysis for human capital data. It introduces the different types of reporting suited to various stakeholders, including external reporting, narrative reporting and internal reporting.
Whilst leaders remain adamant that ‘people are the most important asset’, business has yet to come to an agreed way of valuing and reporting on the value of a workforce’s knowledge. This aside, HR’s role in collecting, analysing and communicating information on the value of people and their contribution to the business is vital and will assist in the design and implementation of HR policies and practices that enable organisations to achieve long-term sustainable business performance.
HR’s ability to analyse and report on human capital data differs significantly across the profession. Understanding the context of data is key and as such there is no single measure, or set of measures, which can adequately convey its human capital value. Organisations need to decide which measures are relevant to them and will give them the information they need to effectively communicate the value and contribution of human capital both internally and externally.
The term ‘human capital’ is widely used in HR to describe people at work and their collective knowledge, skills, abilities and capacity to develop and innovate. Human capital reporting aims to provide quantitative, as well as qualitative, data on a range of measures (such as labour turnover or employee engagement levels) to help identify which sort of HR or management practices will drive business performance.
Our research The intangible workforce: do investors see the potential of people data? shows that external stakeholders such as regulators and investors are increasingly interested in understanding the quality of human capital in organisations.
It’s now commonly understood that the value of organisations is drawn from a mixture of tangible assets in the form of equipment, money, land or other physical objects together with intangibles in the form of brand, reputation, knowledge and people.
Read our report Human capital theory: assessing the evidence for the value and importance of people to organisational success to find out more about human capital theory.
Human capital standards
In 2015 the British Standards Institution, the business standards company, issued BS76000, the first national standard to recognise the importance of valuing people in organisations.
Given the complexity of organisations and the various approaches to managing human capital, measurement can be challenging. The context of the organisation is also a fundamental aspect of human capital measurement: the emphasis for measurement is no longer on absolute measures of human capital, but instead context specific information to enable informed decision making.
Human capital data can be grouped according to the different aspects of HR they refer to. Some data groups are cross-cutting and can combine to create additional data groups, for example:
workforce composition: demographics data including age, gender and ethnicity
recruitment and retention: number of resignations/vacancies/applications, length of service
skills, qualifications and competencies: levels of expenditure on training, types of training provided, length of time to reach competence levels, data on training needs
performance management: performance management results, productivity and profitability data, targets set and met, levels of customer satisfaction, customer loyalty
employee relations and voice: findings from employee attitude surveys
pay and benefits: overall wage bill costs, distribution of individual performance-related pay awards, level of total reward package
regulatory compliance: includes data on the compliance of employees to established standards and guidelines for working practices in particular disciplines
organisation development and design: includes data on spans of control, skills mix and talent pipelines.
Valuing your Talent, led by the CIPD, developed a simple framework that illustrates the different types of data HR professionals can collect to understand human capital. Measures are categorised as Inputs, Activities, Outputs and Outcomes, which relates to their position in the business value creation cycle.